Low Rates Keep Houses from Becoming Foreclosed Homes

Time icon May 4th, 2009 by Autor Joseph Smith

Homeowners are saving their houses from becoming foreclosed homes by taking advantage of record low mortgage rates, according to economists at Freddie Mac.

Freddie Mac economists reported that 50 percent of homeowners who refinanced their mortgage loans with Freddie Mac in the first quarter had reduced their yearly mortgage rate by 20 percent or more and that only 42 percent of refinancing borrowers obtained loans on their home equity, the lowest level in almost 6 years.

However, the economists also reported that the glut of foreclosed homes has pushed down the median house appreciation, which is used as basis for loan refinancing, to just 3 percent, the smallest growth in 6 years.

Frank Nothaft, chief economist and senior vice president of Freddie Mac, said homeowners who refinanced were able to lower their monthly payments by around $160 on a loan of $200,000 after the application of reduced mortgage rates.

Nothaft said the reductions in monthly payments can be translated into approximately $2.5 billion in cash savings that the homeowners can use next year. He added that if the current pace of refinancing keeps up, homeowners can accumulate up to $10 billion in savings in the first year of loan refinancing. Aside from the savings, the homeowners were able to achieve their more important goal of saving their houses from becoming foreclosed homes.

According to Freddie economists, their study on savings from mortgage rates is important during these times when the nationwide unemployment rate is soaring, the sources of family income are dwindling and the number of foreclosed homes continues to rise in many areas. They said the increase in savings from mortgage rates contributed to the rise in consumer spending in the first quarter.

In addition, the Mortgage Bankers Association said that applications for mortgage refinancing increased after the U.S. Federal Open Market Committee told the public about its plan to purchase mortgage-backed securities and Treasury securities. The bankers cited the committee’s announcement as a factor in the decline of mortgage rates that also pushed the increase in sales of existing homes, including foreclosed homes, in many areas of the country.

Even so, the positive effects of the sharp rise in the MBA mortgage refinance index could be hindered by the slow rise in home values, which is largely caused by the glut of foreclosed homes nationwide.

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